LIC managers in the Australian equities market rarely invest in LICs run by rival fund managers. There may be a little pride involved in this attitude, but is it appropriate? Steve Green looks at those managers who exploit this opportunity.
This is a guest post from Steve Green. Steve is a full-time investor with a focus on LICs, event-driven and activist investing. You can follow some of his ideas at his investment blog at www.valueinvestingforaliving.com.
One of the frustrations I have with many fund managers in the Australian equities market is their unwillingness to examine investing in LICs run by rival fund managers. I suspect many feel they do not need to outsource some of the job they do to a different fund manager. There may be a little pride involved in this attitude, but is it appropriate?
Since the GFC, there have been numerous instances where some of the smaller to medium size LICs have traded at large discounts to NTA. The three years that followed the GFC routinely saw discounts in the order of 15%, and it was common to find many of much greater magnitude. Editor’s note: You can see a post on the history of LIC NTA Premium/Discounts here. This proved to be short-lived, yet I wonder whether many fund managers even examined the sector, or had mandates that allowed them to capture this positive re-rating. If you turned a blind eye to this sector, an opportunity was missed to participate in the overall bull market during these years, whilst also receiving the extra benefit of gaining from the contraction in the discount to NTA. The latter benefit in quite a few cases saw extra gains in the order of 30% or more.
Wilson Asset Management (WAM, WAX, WAA, WLE) are one of the rarer fund managers that often exploits this opportunity within their own funds. As individual investors, we fortunately have the freedom to also explore this area in the market. There have been quite a few instances where WAM has taken a large stake in a rival LIC, which has eventually led to some corporate activity in the form of a scrip merger, cash acquisition or a wind-up of funds.
When exploring some of these examples, usually the corporate activity occurs well after WAM taking an initial stake. Investing in the LIC that is being targeted could be rewarding if one gets the timing right. Often there has been no secret in them building up that initial stake, since the ASX requires them to lodge a substantial shareholder notice when they reach 5% of their target.
This list may not be complete, but here are some examples I have participated in the past from corporate activity from WAM in the LIC sector, and had a positive experience. In late 2011, WAM built up a large stake in the Signature Capital LIC, and applied pressure that eventually enabled a large majority of the funds to be returned to shareholders at close to the NTA via an off-market buyback. In late 2012, WAM made a scrip takeover for the Premium Investors LIC at NTA, also giving the option for the target shareholders to receive cash. In 2013, WAM acquired a major stake in the Australian Infrastructure Fund which was already in the process of being wound up. Over the course of the next year WAM achieved a much-improved outcome for shareholders during the last stages of the wind-up, by relaunching the company into the now successful Future Generation Investment Company (FGX).
This year WAM also played a role as a significant shareholder in the AMP China Growth Fund, where unit holders voted to wind up the fund and eventually will receive close to NTA. In all of these examples, there were stages where the target company traded at hefty discounts to NTA. It then led to corporate activity that enabled shareholders to realise their investments at NTA, or very close to it.
Of course WAM are not the only activist to monitor here, and it may pay to be alert to other known activist investors in the market with similar strategies. Possibilities in this regard may include the likes of the Global Value Fund (GVF), Mercantile Investment Company (MVT) and Sandon Capital Investments (SNC).
We shouldn’t expect to invest in situations similar to those described above, and be guaranteed that it will lead to corporate activity and large profits from the strategy, as there also have been times it has failed. Yet I believe it is an area well worth examining, and one that many fund managers will overlook. Sometimes history repeats, and to show that one may be able to occasionally identify these opportunities prior to them occurring, I recently made a post about Century Australia Investments Limited (CYA). Last week CYA announced they are accepting a takeover proposal from WAM Investments.
Whilst I may not have forecasted the precise details of the transaction, I was able to benefit from the conclusion I drew that Wilson would look to take over the management of CYA. With large discounts to NTA much rarer in the LIC sector compared with a few years ago, we may not be fortunate to be presented with similar opportunities in the near term. In recent times though there has been a flood of new issuance of LICs, not too dissimilar to that seen in the years prior to the GFC. It may be prudent to keep this strategy in the back of one’s mind, in case we once again see the increased supply of LICs play a role in them trading at large discounts one day in the future.